Going Concerned Concept of Accounting
If I tell you the meaning of this in one line, then
accounting is done assuming that the business will not be
closed in the near future, the business will be run
continuously for many years.
Going Concerned Concept is used in accounting.
I give you an example of this.
How? You must have heard about depreciation once.
Yes sir, we have heard depreciation.
What is depreciation?
For example, let me tell you what depreciation is.
You bought a machinery.
Its cost price is Rs. 10 lakhs.
You bought a machinery whose cost price is Rs. 10 lakhs.
And you have been told that the life of this machinery is 5
years.
Machinery will run for 5 years.
So friend, your 5-year P&L account, there this expense of
Rs.
10 lakhs will increase to Rs.
2 lakhs, 2 lakhs, 2 lakhs, 2 lakhs, 2 lakhs.
If I talk about the straight line method, then this expense
of Rs.
10 lakhs will not go in the first year's P&L.
It will increase to Rs.
2 lakhs, 2 lakhs, 2 lakhs, 2 lakhs, 2 lakhs and will
increase to Rs.
5 years P&L.
This is taught to you by Matching Concept.
Who teaches us this?
Matching Concept.
Matching Concept says that this expense of Rs.
10 lakhs will benefit you for the next 5 years.
This expense of Rs.
10 lakhs will benefit you for the next 5 years.
You will run the machine, produce goods and from there you
will earn profit by selling those goods.
Right? Rs.
10 lakhs divided by 5, 2, 2, 2, 2, 2.
This is what Matching Concept says.
And we call this depreciation.
Rs. 10 lakhs, i.e.
the cost of the machinery we distributed it in its life for
5 years.
This is called depreciation.
This 2, 2, 2, 2, 2 lakhs is called depreciation.
Now, as soon as we decided in the first year in the year of
buying machinery that we will distribute this Rs.
10 lakhs in 5 years and in the next 5 years' P&L we will
write Rs.
2 lakhs, 2 lakhs, 2 lakhs, 2 lakhs according to Matching
Concept.
So friends, you have already assumed one thing.
As soon as you accepted that you will transfer the expense
of Rs.
10 lakhs in the next 5 years' P&L by writing Rs.
2 lakhs, 2 lakhs, 2 lakhs, 2 lakhs then you have already
accepted one thing that you will make P&L in the next 5
years' i.e.
the business will run for the next 5 years.
This is called Going Concern.
Assuming that the business will continue to run the
business will not close in the near future this is called
Going Concern Concept.
This is the basic assumption of accounting.
This is the basic principle.
That you will do any accounting, any general entry any work
of accounts thinking that the business is not going to
close in the near future and it will continue to run.
Sir, for example, we have already decided that we are going
to close the business in the next 6 months then you will
put all the depreciation here.
Assume that in the third year you have decided that you
don't want to run the business for the next 2 years and you
are going to close the business in the third year.
And how much depreciation has been applied so far?
Only 2 and 2 and 4.
6 lakhs were left.
So you will put a total of 6 lakh depreciation here.
You will put a total of 6 lakhs here.
2 and 2
Depreciation of 4 lakhs for the next 2 years you will put
it here.
That is, when we do accounting on the basis of Going
Concern then the accounting becomes a little different.
When we know that we are going to close the business then
the accounting becomes a little different.
But in 99% cases accounting will be done following the
Going Concern concept.
This is a 1% chance.
This is a one-time event in the life of the business.
That we are closing it.
Businesses are not closed every day.
They open every day and do not close every day.
Right? Yes.
Let's read out the Going Concern concept written there.
Let's read it very easily.
The Going Concern concept in accounting states that
business activities will be carried by any firm for an
unlimited duration.
This simply means that every business has continuity of
life.
Hence, it will not be dissolved shortly.
Dissolved means closed.
The business will not be dissolved shortly.
This is an important assumption of accounting as it
provides a base for representing the asset value in the
balance sheet.
This is a very important factor because it also hits your
depreciation due to which it also affects the accounting of
fixed assets in your balance sheet.
Let's see an example written here.
Plant and Machinery was purchased by a company of Rs 10
lakh and its lifespan is 10 years.
According to the Going Concern concept every year some
amount of asset purchased by the business will be
represented as an expense and the balance amount will be
shown as an asset in the books of account.
Thus, if an amount is incurred on an item that will be used
in the business for several years ahead it will not be
proper to charge the amount from the revenue of that
particular year in which the item was purchased.
Only a part of the purchase value shown as an expense in
the year of purchase and the remaining balance is shown as
an asset in the balance sheet.
This means that we have accepted that we are going to run
the business for the next 10 years and we are going to
continue it for the next 10 years.
This is the Going Concern concept.
This is the principle that assuming that the business will
not be closed in the near future but will continue the
Going Concern concept says
OK. Thank you.